Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, thousands try to glean what they can from his thinking processes and track his investments.

While we can't know for sure whether Buffett is about to buy Frontline (NYSE: FRO) -- he hasn't specifically mentioned anything about it to me -- he's left us some clues as to whether it's the sort of stock that might interest him. Answering that question could also inform whether it's a stock that should interest us.

In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size and a reasonable valuation, he demands:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. Simple, non-techno mumbo jumbo businesses.

Does Frontline meet Buffett's standards?

1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.

Let's examine Frontline's earnings and free cash flow history:


Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.

Frontline's earnings have sunk over the past year or so, though it's impressive that the company has more or less held up through the recession.

2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.

Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to put them in context:

Company

Debt-to-Equity Ratio

Return on Equity (LTM)

Return on Equity (5-year average)

Frontline

357%

20%

77%

Dryships (Nasdaq: DRYS)

103%

2%

9%

General Maritime (NYSE: GMR)

193%

(13%)

11%

Tsakos Energy Navigation (NYSE: TNP)

161%

1%

21%

Ship Finance International (NYSE: SFL)

251%

30%

31%

Source: Capital IQ, a division of Standard & Poor's.

While Frontline's return on equity is among the highest of its peers, this is partially due to its large debt load. This isn't an industry known for strong competitive advantages.

3. Management
Frontline's CEO, Jens Martin Jensen, has only been at the job since 2008. However, he has been working in the shipping business for decades.

4. Business
The shipping industry isn't subject to technological disruption every couple of years.

The Foolish conclusion
Frontline doesn't exhibit many characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity with limited debt, and a long tenured CEO, though Jensen's prior experience is a plus.

Ilan Moscovitz doesn't own shares of any company mentioned. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.